Facebook’s initial public offering is a milestone in the evolution of not only social media, but media itself. Fairly or unfairly, Facebook is the lightning rod, the proxy, for the broader discussion about how fast consumer behavior is changing through our increasingly frictionless ability to share and socialize.
However, social media is not a technology or a platform; it is innate behavior. And human behavior, Facebook’s base currency, is unpredictable. Since any media is reflective of consumers (and not the other way around), Facebook’s dominance depends on its grasp of its users implicit and explicit behavior.
The Network Effect
The network effect is never sustainable, since all media entropically self-organizes into smaller and smaller affinities. While Facebook allows users to organize their news feeds around friends, causes, and brands as affinities, it is perceived as a mass service, given its size and scale with a relationship to its customers, often similar to that of a utility. The more people need (not want) the service, the more entrenched this attitude.
Invariably, Facebook must devolve into smaller and smaller niches beyond relationships with individuals. For example, I came across ads on TV last week for dating sites Christian Mingle and BlackPeopleMeet. The fragmentation in online dating will replicate in social networking unless Facebook breaks up its monopoly itself first.
Facebook generated a healthy $3.7 billion in revenue in 2011. The company promises to drive significantly more revenue through brand advertising. However, YouTube is a more natural leader in brand advertising, because video is the lingua franca of brand awareness. More than 80 years of television reinforced the power of video to build brand.
And while Facebook greatly benefits YouTube, since it allows embedded videos, YouTube (or Twitter) does not really help Facebook. Of note, YouTube is combating the aforementioned network effect challenge by creating niche TV channels online to reinvent the TV experience. Facebook will ultimately need to acquire a video version of Instagram (hello Viddy?) to compete in brand advertising.
Similarly, Facebook has not yet articulated its plan to monetize transactions. Obviously, transactions are real money with direct return on investment. Zynga represents an enormous amount of Facebook’s transaction revenue (12 percent of overall revenue). Inevitably, consumers will want to buy at the moment of emotional engagement, regardless of environment or media. This shift in buying behavior will allow users to purchase within an individual unit of media — video, tweet, photo, email — without having to click multiple times through a different environment.
Facebook cannot wait for this to happen, because the longer it takes, the more it institutionalizes the misperception that consumers will not purchase in social environments. This situation is exacerbated by Facebook’s insistence on charging a usurious 30 percent fee on transactions, instead of following the path to how it got its billions in the first place — getting as many people to engage as possible. After all, Google and Apple make billions of dollars a nickel and 99 cents at a time.
Four years ago, the world was abuzz with discussions of RockYou and Slide, because the companies represented the power of the application within the Facebook environment. Facebook is a walled garden, though, and in order to protect its revenue sources and satisfy its terms and conditions, the company must carefully manage outside innovation on its platform at all times. Ultimately, it has to move the goal line, which should limit development in the future.
For example, if Facebook banks on the belief that better, more robust content on brand pages brings more revenue from those brands, it must invariably roll out more do-it-yourself functionality to its platform. This added functionality would again cannibalize partners such as the content-management systems that currently facilitate the execution of brand pages. As a result, Michael Lazerow at Buddy Media and Michael Scissons at Syncapse smartly expanded into larger social customer-relationship-management platforms, of which Facebook is a piece in the customer journey, not the customer journey.
Speaking of CMS, Facebook deserves enormous credit for innovation by avoiding MySpace’s error of remaining static and cluttered. However, as Facebook allows the advertising community to recraft Facebook pages to mirror website creative, users lose the familiarity of the template. Facebook is like Starbucks: It is the familiarity of the experience that provides comfort to the customer. Social readers are a better way to experience Facebook, but for some users, any change will cause them to question Facebook’s personal value to them, although this is certainly not unique to Facebook.
Over the years, Google divulged more and more of its algorithm to blunt improper search-engine-optimization tactics and seduce media buyers to participate on the platform. And while Facebook’s announcement of its EdgeRank was a positive step, marketers really don’t know how the algorithm works in terms of what shows up in the news feed despite new ad units that help solve this issue. This lack of transparency limits ad spend, and allows companies such as General Motors to waste $30 million in spending without satisfactory return, which is bad long-term business. Facebook can and should come clean about its recipe for engagement. Money always flows into transparent markets — a lesson the U.S. government should bear in mind.
Lastly, mobile changes everything. Already, approximately 52 percent of all Facebook engagement is through mobile. Putting aside the quality of the Facebook mobile application, we simply do not yet understand how the consumer will adapt to mobile advertising, and how and when we eliminate broadband hurdles. However, we know people will consume more media for shorter amounts of time, and mobile will be the beneficiary. Facebook must spend its war chest to develop for mobile and adapt for the desktop rather than the current focus of developing for the desktop and adapting for mobile.
ROI should not be the impediment to Facebook’s growth. While GM made waves by removing its advertising from Facebook altogether, smart marketers are able to capture ROI from Facebook, although it depends on a number of factors that are idiosyncratic to each business — one size does not fit all.
Regardless of the market’s esteem regarding Facebook’s market value, Facebook will reshape everything that comes after. But people are only at the end of the beginning of experiencing the expression of social media. The challenges to Facebook’s sustained dominance are real, and the world is an impatient place. Facebook is up against what every single one of its users faces every day — a lack of time and a lot of competition for their attention.